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Asset Allocation and Alternative Diversification
Review of Current Research
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Funds of Hedge Funds
The performance and diversification benefits of funds of hedge funds
Emily Denvir, Elaine Hutson. Despite the recent phenomenal growth in funds of hedge funds, there has been only a limited amount of research on their performance – most of the academics seem to focus on individual hedge funds. In this paper, Emily Denvir and Elaine Hutson are filling the gap by analyzing the performance and diversification potential of a sample of 332 funds of hedge funds (FOHFs) for the period from January 1990 to May 2003. Consistent with prior studies, the authors find that over the considered period, funds of hedge funds appear to underperform a hedge fund index on a risk-adjusted basis. These sorts of findings are usually explained by the ‘double fee’ structure inherent in funds of hedge funds. More...
30/08/05
Hedge Fund Allocation
Optimal hedge fund allocation with asymmetric preferences and distributions
Ivilina Popova, David Morton, Elmira Popova. It is now well documented that several hedge fund strategies tend to have non-normal return distributions and exhibit significant positive or negative skewness and a high level of kurtosis. Portfolio optimization and asset allocation models based on the mean variance framework ignore this. Consequently, they are unable to provide an accurate view of how hedge funds effectively behave within a portfolio. In particular, most of the time, they suggest overoptimistic hedge fund allocations, with great mean variance characteristics, but unacceptable levels of skewness and kurtosis. In this paper, the authors provide an effective means of dealing with this problem. The general problem of maximizing an investor’s utility of wealth function over one period and a set of asset classes with known return distributions is hard to solve exactly, because it involves both non-normal distributions and a continuous range of potential returns. More...
04/04/05
  
   
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